A have already submitted a quick-read note on SWN and a CHK note is coming very soon.

I think this is a terrific asset. It would have been under-utilized under CHK management (barring an equity issuance to finance it).

SWN has a better financial position, but the acquisition cost is not low. They stand a chance to make a solid return in the long run. But I don't think it will be a true "steal." Overall moderately positive for the stock, IMHO.

I would argue the NGL pricing has already suffered a heavy penalty due to overproduction (ethane particularly). Oil, on the other hand, should be more immune given that it is a water-borne commodity and the domestic production should simply displace imports.

I am already seeing comments on several conference calls about reduced plans for gas drillling.

The Marcellus may be different, however, than the rest of the nation. Obviously, the differentials create a tremendous incentive to the midstream sector to expand take-away capacity (a very lucrative business with objectively strong fundamentals). When demand is strong, all capacity addition happen on a pre-contracted basis. So the Marcellus will produce to that capacity (otherwise losses to produces would be even greater due to demand payments that are effectively sunk cost).

Marcellus operators, in my opinion, are in a desperate need of a long-term hedging market that would not be punitive. It will gradually develop, in my opinion, with new highly liquid benchmarks in the Northeast region.

You use P/E ratio heavily to imply that the stock is undervalued. Would it make more sense to use EV/EBITDA metric given that P/E ratios do not work that easily for E&P companies and are therefore very rarely seen in the analysis?

Also, doesn't your analysis suggest that Chesapeake is overvalued, albeit slightly, relative to some of its peers, like Devon or Apache, for example?

I am perhaps more optimistic. A garage sale is a healthy process, in most cases. It cleans the house and helps focus attention on the core operation.

There is one important aspect to CHK: its market cap is not that large (in fact, smaller than COG's or RRC's). At the same time, the producing asset base is very significant.

CHK is certainly not a simple asset portfolio to get one's hands around (and a partial short sale may in fact be not unexpected to simplify the story). But I am not prepared to think of it as an implosion of some sort.

"Net income amounted to $15 million or 30 cents per share which were above investors' expectations."

Newsline I googled said the per share number is 2 cents. How many shares are there?

You also state:

"Production expenses for the current quarter declined by 18% and is to follow a similar trend in the near future."

This sounds really terrific, particularly the trend. How do you calculate the cost? Could you please provide some back up data/references/links to the source?

You further stated:

"Capital expenditure is expected to be in line with the budget."

Did you mean to compare capital expenditure to discretionary cash flow?

I was particularly intrigued by the Ohio Shale Project:

"Chesapeake announced 9% increase in production mainly attributed to the Ohio Shale Project and its strategic investment decisions."

Could you please provide some detail on the Ohio Shale Project and on the "strategic investment decisions." I really would like to understand the 9% number you are quoting. A link to the source would be very helpful too.

Many thanks indeed in advance for clarifications and thank you for an interesting read.

Just one comment. I would not call it a firesale - that would imply that assets CHK is selling have substantially higher value than the company has been able to realize. In reality - and that is, in my impression, the greatest misperception - some of the acreage, even in the more exciting plays, has very little value. The simple explanation - it physically cannot be drilled before expiration deadline, by CHK or by a potential buyer. I will provide explanation in my next note.

Sorry for not providing greater detail on the calculations. I welcome you to have a look at my yesterday's note on Cabot for some additional discussion (and more to come in my next note on Cabot).As I said, per acre math can be misleading. So when you take CHK's total leasehold and try to attach a blanket dollar multiple to it, your conclusions will be just as accurate as this type of analysis you are suggesting to use.

The JV between CHK and STO dates back several years and, if I recall correctly, covers a broad AMI in the Marcellus. Details of agreements are probably private, but it appears that CHK and STO were both sellers.

Good question. I would ask a broader one along the same lines, what does this say about the value of millions acres under lease in Utica and other "young" plays? EVEP's package is certainly a test, so is CHK's and Devon's - those have also been on the market.

I am not sure the "firesale" argument alone convinces me: i.e., I don't think if CHK had another six months to market the package the price would increase to $5,000 per acre. I am in a more pessimistic camp.

The driver is perhaps the combination of both factors: a "must sell" situation plus the amazing abundance of very productive but still not quite "core" (as in 3-4 Bcf per 1,000 foot of lateral length) acreage. Given the severe takeaway and gathering infrastructure constraints, operators are struggling to develop even their "best of the best" acreage. In that context, the paradox is really not a paradox: fringe acreage does not have much value. Goes for Utica, Eagle Ford, Bakken, end essentially every other play.

Very keen observations. I would not say though that liquids and oil production are not growing. They are. If you look at year-on-year comps, the NGLs growth is perhaps in the 10% range. However, if you single out the newly discovered liquids plays, the rate of expansion will be much more pronounced.

But I agree with you, to expect an explosive growth in oil/liquids similar to what we've seen in gas shale production would be wrong. The majority of liquids plays are combo plays, and infrastructure issues are challenging. Besides, there are limitations imposed by the size of end markets (exporting ethane, for example, would be just as challenging as exporting methane). You are also very correct about the decline rates that tend to be higher, at least for the moment, in the liquids plays than in gas plays. By the way, in combo plays, the declines for liquids production vs. gas production is often different.

A very keen observation. You are absolutely right. Three considerations on this though:

In this analysis, I clearly needed to assign some sort of "average" productivity to "gas-equivalent" rigs. I deliberately decided to err on the lower-productivity side ("Barnett-like" productivity) rather than use the "best sweet spot" productivity ("Susquehanna-like") as a proxy. This makes the picture more realistic since the end result is 650-750 equivalent rigs industry wide (there are simply not enough super-sweet spots in dry gas shales to accommodated 700 rigs).

As the industry has been migrating away from dry gas, the "gas-oriented" mix has also become more "wet." I would estimate that in the Baker Hughes gas rig count more than 60% of rigs are drilling on wet gas prospects. As an example, Devon is only drilling for rich/super-rich gas in the Barnett (and I would not be surprised that the same is true for CHK in the Barnett).

Finally, let's assume for a moment that I adopted a different approach and assigned a productivity index to each rig (purely illustratively, Susquehanna=1, Haynesville=Fayettevil... etc.). The conclusion would be essentially the same, just expressed in a different measurement unit.

Most importantly, even if CHK's "equivalent" rig count is in fact lower, the conclusion that current industry-wide activity is more or less sufficient for flat US production in 2013 still holds. Again, the empirical starting point is CHK's production forecast. If they manage to keep their gas production close to flat with less rigs than I assumed, that implies even more projected production on the industry-wide basis (since CHK is more dependent on gas from liquids-rich plays than the industry as a whole).